Just when you thought that DreamWorks Animation (NYSE:DWA) would be dead money until we see how Flushed Away fares later this month, it surprises us all with a third-quarter profit.
The computer animation specialist earned $0.10 a share for the quarter; Wall Street was expecting a small deficit. Revenue fell by 36% to $55.6 million, yet that, too, was well ahead of the $38.8 million that analysts had been projecting.
Theatrical animation reports are going to be spotty. We saw it with Pixar, before it was gobbled up by Disney (NYSE:DIS), and DreamWorks Animation has been no different. With the company fetching a few cents more than its $28 IPO price tag after two years of trading, it may not seem like much of a victory, but it certainly is no sign of defeat.
Two years of rendered slumber
Since going public in 2004, DreamWorks Animation has come a long way. Sure, the share price paints a different picture. It feels more like a round trip to nowhere or a slow cruise on the S.S. Stagnancy. However, let's think back to what the company looked like back then.
Just as Pixar went public in 1995, as Toy Story was revolutionizing the animation field, when DreamWorks Animation went public, it didn't have much going for it beyond the Shrek franchise. Now it has its Madagascar sequels to watch out for, as well as any surprising hits that may come along. Over The Hedge may have failed to live up to initial expectations back in May, but it has gone on to top the $325 million mark in worldwide box office sales, which should help fuel DVD sales here in the fourth quarter.
Even the box office disappointment of Wallace & Gromit: The Curse of the Were-Rabbit hasn't translated to a colossal blunder in the retail market, where it has sold more than five million copies. Yes, Madagascar has gone on to sell four times as many DVDs, but that's pretty much the point with DreamWorks Animation. Pixar has been methodical about its flicks, limiting its theatrical releases to one -- and sometimes none -- in any given year. DreamWorks Animation always seems to have something new to show its audiences every few months.
The end of direct-to-video as we know it
When Disney released The Return of Jafar in 1994 directly to the home video market, it seemed like a peculiar move. Aladdin had been a huge hit on the big screen, and sidestepping the multiplex distribution process for a sequel seemed like money was being left on the table.
It didn't work out that way. Consumers found themselves scrambling for the film on VHS, and it prompted then-CEO Michael Eisner to reveal that the film proved to be more profitable for the company than the smash hit Pretty Woman a few years earlier.
We all know how Disney slaughtered the cash cow after that. It kept hitting the direct-to-video market with low-budget productions, to the point where consumers stopped buying and Disney's brand in animation was muddied.
It's not just Disney's abuse of the platform that led to the industry retreating from direct-to-video releases. DVDs just aren't selling as well as they used to. Even with hit movies like Shrek 2 and Finding Nemo, the studios warned about unusually high returns of unsold copies from retailers.
There is no denying that the marketing impetus is back on making some decent coin at the box office. DreamWorks Animation was going to release Puss in Boots, a spinoff starring the Antonio Banderas character from Shrek 2, as a direct-to-video project, but now it's going to take it to the big screen.
Those crafty penguins from Madagascar? A few years ago, they would have been prime material for a direct-to-video release, but now the company is teaming up with Viacom's (NYSE:VIA) Nickelodeon to transform them into a stand-alone movie franchise for DreamWorks Animation.
Too much rendered ink
Naturally, loading up on theatrical releases with computer animation isn't the ideal solution. It's actually a bad option, because it's what everyone else is doing. Companies like Sony (NYSE:SNE) and News Corp. (NYSE:NWS) have also established a presence in computer animation, and the big screen is apparently not big enough for blockbusters for everyone.
This brings us to the investing potential of DreamWorks Animation. The stock has gone nowhere. The playing field is crowded. Direct-to-video is drying up as a major release outlet. What's an investor to do?
My choice would be to buy DreamWorks Animation. Overlooking the lull in 2005, which was apparently not as bad as it could have been, those same analysts who aimed too low Tuesday night believe that DreamWorks Animation will earn $1.74 a share next year. DreamWorks Animation for 15 times forward earnings is a pretty good deal.
It gets even better, though. Content is power. Maybe you've played one of the Activision (NASDAQ:ATVI) games based on licensed DreamWorks Animation characters. The future is going to be even better on that front, as opportunities for multiplayer gaming and in-game advertising reward those rich in animated content.
Cynics who felt that Disney overpaid for Pixar strictly on an earnings basis have disregarded the value of building out a vault of characters. They miss out on appreciating the power of having a growing fleet of characters that can be monetized in perpetuity.
The future is going to get even brighter for DreamWorks Animation, and it has nothing to do with adjusting the hues on your DVD player.
DreamWorks Animation, Activision, and Disney are all Motley Fool Stock Advisor newsletter recommendations. Click here to get the newsletter's new special report absolutely free.
Longtime Fool contributor Rick Munarriz loves the art of animated filmmaking. Yes, he owns shares of Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
